Fannie Mae and Freddie Mac could become key players in the subprime mortgage market as a number of private lenders flee the sector or tighten up their lending requirements.

The sector has experienced one calamity after another this year, with rising borrower delinquencies and a number of high-profile casualties, ranging from two Bear Stearns hedge funds and other subprime investors, including United Capital Asset Management's Horizon Funds, to private-sector subprime lenders such as the now-bankrupt New Century Financial Corp., which made $60 billion in subprime loans in 2006. A report by Credit Suisse analysts last week estimated that banks could lose as much as $52 billion due to collateralized debt obligations that invested in U.S. subprime mortgages. And last Wednesday, Moody's Investors Service lowered ratings on almost 400 2006-vintage MBS and threatened to downgrade more, while Standard & Poor's said it could downgrade $7.35 billion worth of subprime bonds.

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